Brace for Impact: How to Prepare for a Recession

Recession fears eased a bit in 2024, with a low unemployment rate, rising wages, and inflation drifting down towards the Federal Reserve’s 2% target,  the U.S. central bank cutting interest rates, and many economists thinking the Fed had nailed a “soft landing” from the high inflation of 2021 and 2022.

But now the jitters are back in the news in a big way, given the increased focus on tariffs by the U.S. depending on the day (and the expected pushback in retaliatory tariffs by trading partners), accompanied by volatility in the stock market, and declining consumer confidence.

On March 10, David Mericle, chief U.S. economist for Goldman Sachs, says the firm has raised its 12-month recession probability from 15 percent to 20 percent. Bruce Kasman, chief global economist of JP MorganChase, on March 12 raised the odds of a recession to 40 percent in the banking giant’s outlook. Kasman said the risk of recession would rise to 50 percent or more, if reciprocal U.S. tariffs on trading partners were imposed in April and meaningfully come into play.

“The risks of recession have risen quite significantly,” Diane Swonk, chief economist for the global accounting firm KPMG, told Newsweek. “We are not there yet and could see a course correction but are moving closer to the edge.”

A recession occurs when economic growth stops, and the economy starts to shrink. Recessions come with negatives such as prolonged stock market declines, job losses, a drop in real estate values, and bankruptcies. During a recession, there is typically a decline in industrial and trade activity. Consumers may see increased inflation or higher-than-normal levels of unemployment. As a result, consumer confidence also suffers, meaning that people may be less willing to spend money than they would usually. The downturn can spread across several months or years.

It’s never easy to predict a recession until the economy is in the middle of one (or sometimes after it’s over). In 1982, famed economist Paul Samuelson joked that “the stock market has predicted nine out of the last five recessions.” Still, with clouds on the economic horizon, it’s a good idea to be prepared.

It’s Cyclical

Economies work in cycles. They go through periods of expansion and growth, as well as periods of decline. Recessions are inevitable. But, as noted, they aren’t necessarily predictable. It’s impossible to know in advance exactly when one will hit, how bad it will be, or even when one has started or ended, given that common definition of a recession as six months of decline in the GDP.

The Massachusetts-based private National Bureau of Economic Research (NBER), which dates recessions in the U.S., defines one as “a significant decline in economic activity spread across the economy, lasting more than a few months.” As long as these conditions are met in part, the nonprofit research organization considers them interchangeable.

Some recessions are mild. Economic activity declines and unemployment rises, but the economy quickly recovers. For example, the downturn in the spring of 2020 during the pandemic led the NBER to call it a recession, though officially it lasted just two months. Other recessions, such as the 18-month downturn from 2007 to 2009 (often referred to as the Great Recession), can cut deeply and wreak widespread havoc on people’s financial lives before economic growth resumes.

So, a recession will inevitably occur sometime. And, as noted, until those GDP numbers come in, we may not even know it is happening until it is over.

But while you can’t control what happens to the wider economy, you can take a few steps to help you survive the financial headwinds. Now is the time to understand what you’re spending today and to anticipate your needs over the next six months.

Bulk Up

To start, set aside three to six months’ worth of your basic living expenses in an emergency account to deal with unfortunate events such as job loss, damage to your home, or illness. In a recession, having an emergency fund can save you a lot of stress. It can also help you avoid becoming financially over-extended or having to leverage debt just to get by. And since recessions can be unpredictable, aim to boost your emergency savings to a year of your essential expenses.

While tapping into your emergency fund is never a decision you should make lightly, losing a job or being forced to live on a reduced salary certainly qualifies as a good reason to use some of the cash you’ve put away. However, it’s important to rebuild your emergency fund as soon as your financial situation is more stable. Otherwise, when the next emergency hits, you might have to make tough decisions, such as withdrawing money from your retirement account or applying for a home equity line of credit.

Make a Budget

Whether you do a great job keeping your spending on track or you’re just good at estimating it every month, a budget is the best tool to maintain your financial well-being, especially if there’s economic uncertainty. The goal is to free up some additional money to put into savings and to reduce expenses so that you’re ready in case you suddenly face the prospect of lost income.

Make a budget for food, expenses, and utilities based on your current salary, while taking note of how much you want to save, what you can skimp on, and what you can’t. Sticking to that budget is key to making it through an economic downturn. It’s not always easy, but a budget app can help even the most disorganized person get their financial ducks in a row.

Revisiting your budget shouldn’t make you feel that you have to deprive yourself. The aim here is to find some low-hanging fruit—perhaps subscriptions or memberships that you don’t use very often.

A JP Morgan Chase study in 2022 found that 71% of cardholders “wasted more than $50 per month on recurring payments for things they did not need,” such as unused gym memberships and magazine subscriptions. So, if you are tossing magazines still in the wrapper or paying for a gym you don’t go to, consider canceling. (And remember to visit the public library to read that periodical while buying a treadmill for your home—or, better, walk to the library.)

Pay Off Debt

You might be worried about paying off outstanding debts such as credit card bills, utilities, or student loans. If you experience a loss of income, you might have to forgo paying one or more of these bills, so it’s important to understand which bills you need to prioritize. After all, if you lose income, you may not be able to pay every bill on time or in full every month, and that will have a direct impact on your credit scores.

You should prioritize your payments so that your available cash covers as much debt as possible. Definitely pay your rent or mortgage on time and in full. You don’t want to face foreclosure or eviction. Also, any debt with high interest rates should have a high priority.

Remember, if you’re falling behind, reach out to your creditors and ask for hardship concessions. These might include making interest-only payments on your debt or putting payments into forbearance.

Diversify Your Investments

If you don’t have all of your money in one place, you can mitigate your paper losses, which makes riding out the dips in the market a bit easier. If you own a home and have a savings account, you already have a head start: You have some money in real estate and some money in cash.

Try to build a portfolio of investment pairs that aren’t strongly correlated, meaning that when one is up, the other is down, and vice versa (such as stocks and bonds). This also means that you should consider asset classes and stocks in businesses that are unrelated to your primary occupation or income stream.

The stock market typically slumps before a recession begins and rebounds before the economy improves, so if it seems likely we are heading into a recession (even if it turns out to be temporary slump), that can be a good time to buy stocks when prices are lower. To reduce your tax obligations, you can also sell some underperforming investments—what’s known as tax-loss harvesting.

When it comes to your investments, be wary of making emotional decisions when the markets get ugly. If you sell every time there’s a market downturn, you will end up always buying high and selling low. Although it may be tempting to stop investing during a recession, continuing to invest could be a smart move. When markets eventually move higher, having bought during hard times can add to long-term returns.

Career Opportunities

Recessions often result in high levels of unemployment. So, it’s important to consider how tough economic times could affect your career and have a backup plan should you face a layoff. You should also update your resume and other job-hunting tools ahead of time.

For workers worried about a layoff, it may be beneficial to pick up a side gig such as freelancing or working for a rideshare application. Having an extra stream of income can not only help in the event of a layoff, but it can make it easier to build your emergency savings while you’re still employed.

Start your search for a side gig by refreshing connections within your professional network. Having established relationships with a variety of organizations can give you a huge leg up in the job market. You might consider reaching out to your network via social media or offering to meet up in person for coffee.

Conclusion: Be Flexible, Be Ready

We don’t know for sure when a recession will hit, nor how serious it will be. Every dollar you can put aside now will ease any economic pain you suffer if things do take a turn for the worse.

Nothing lasts forever. Bull markets end and so do bear markets. Economic expansion will eventually contract into a recession, but growth will start again once the recession eventually ends.

To get your financial plan started, or to strengthen the plan you already have, consider working with a financial professional. For more advice, see a wealth adviser for help.